Friday, November 28, 2008

Real Estate Emotions: November, continued Panic

We're two months into panic now. Let's be blunt, its worse than I expected. I'll repeat what I've been saying: "For those waiting for the crash in house prices in high end neighborhoods, the big drops happen during Capitulation." You have four or five months to wait until the start of Capitulation and then another year for the emotion to do its job.

For the business cycle, let's look into one of the rare forward indicators, the Baltic dry index.

The above is from Bloomberg

You can now charter a ship for pennies on the dollar compared to six months ago. This is a really ugly forward indicator. Until this index shoots up a lot (say to 5000 from the current 818 733), it implies an imploding world economy. Yea... things are much worse than I thought they would be.

I've been using the following graph to illustrate the emotion changes versus the ARM resets. The missed payments have put us into quite the credit crunch. Alt-A is only two seasons away!

1. Optimism
2. Excitement
3. Thrill
4. Euphoria (market price peak) Peaked in late 2005/early 2006
5. Anxiety (I'm a long term investor, not a speculator. Lasted ~10 months)
6. Denial (Reached in October of 2006 until mid-May of 2007, ~8 months)
7. Fear (Reached in mid-May of 2007 to mid/late February 2008, ~9 months).
8. Desperation: since mid/late February 2008 to late September 2008 (~8 months)
9. ****Panic*****: Current state, started Late September 2008.
10 Capitulation: Spring 2009 through the winter of 2009. Yes, basically 2009!
11 Despondency (start of market price bottom) Not before winter 2009. Possibly as late as end 2010. Much more uncertainty here.
12 Depression (end of market price bottom) Not over before summer 2011, probably later. It could be as late as 2014. Don't let anyone BS you into buying soon. There will be a long market bottom.
13 Hope (hey, this investment has picked up off its bottom)
14 Relief (The worst is over...) about 2017
15 Optimism (cycle starts again)

I created this graph on emotions and value, for its not really a sin wave, its much more of a rounded sawtooth...

I wonder if everything falling apart won't correct house prices like the stock markets. Oh... there will be a six month delay (or more). We're on an accelerated cycle. Panic started barely within my fall prediction. Each emotion is supposed to be for a year in a normal environment. Well... The housing bubble overshot the normal levels, so the downside will be more severe and is happening fairly fast. At most 9 or 10 months per stage (on the way down).

I'm waspredicting a short panic (six months instead of a year) that blends right into Capitulation; but now I wonder if panic won't persist for a whole year.

Remember, Capitulation is the time of the greatest price drops. At least in the markets that survive until then.

Note: Some blogs have the emotions tracking about a year behind mine (Irvine housing blog.) If anything, there is a chance of a protracted downturn than the last one. I would love it if someone who point out a forward looking indicator that isn't ugly.

To think, the majority of layoffs lie ahead.

We won't be done with the real estate decline until the emotions cycle through. So relax. Its a long time until buying time.

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Thursday, November 20, 2008

End of the Economic world!

Not really...

But the Yugo is exiting production.

I find it ironic that its demise is mostly due to it no longer being the cheapest car in the world. I also feel bad as I've been making fun of Yugos since 1989. ;) I had no clue they were still in production!

The factory is being upgraded to produce "anti-credit crisis car."

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Tuesday, November 18, 2008

CA debt projection for next year

I'm amazed at the debt projection trend for 2009 for California. It was planned to be a $9billion dollar debt. I've gone through news articles on Google to see how its growth with time.

Basically, the debt projection is growing $1.2 Billion per month give or take.

late comment: The dates on the x-axes are the projected debt by news article date in 2008. In September of 2007, the projection was ~$9billion.

Anyone who thinks raising taxes needs to talk to someone who employees people. Everyone from my employer to my mechanic will 'suck up' tax increases by reducing head count in California. As much as people like to discredit Reaganomics, the reality is that we've gone too far on the Laffer curve in the state of California. Make fun of 'supply side' economics all you want. But I know of more than a few doctors who will not expand their offices as the added take home revenue cuts their hourly wage. Heck, I was able to see one business study (about a year ago) where taxes pushed an expansion so far into the red, that if the business owner had expanded his take-home would have dropped!

What's sad is economically California is far better off than Florida, Arizona, Nevada, Michigan, and Ohio. Sadly, I think it will take the layoffs of 2Q 2009 and 3Q 2009 to wake people up. :( The layoffs until then will be trivial in California. (Not the case for Michigan and Ohio.) Yes, I called a *really bad* economic year trivial.

Now when will people wake up and realize turning factories into condos and shopping malls is only good if the overall economy is in balance. Oh, I agree with the mills of Connecticut being turned into apartments and condos. Those jobs should have been automated away. But driving out jobs that pay more than the median income for a region? That's just silly.

I'm going to be *very* curious to see how the advertising slump (which has gone past the tipping point) and the Venture capital crunch effect California. I see no way either will reverse within two years; its going to be dot bomb part deux with interest due.

Got Popcorn?

see the supply/demand curve in my last post to see why the 120 day attempted halt in foreclosures in California is doomed. It might be remembered as the state's Smoot-Hawley.

Saturday, November 15, 2008

Why I'm not posting

I haven't been posting as most of the news hasn't been housing related but rather broader economy. I have no intention of starting a stock blog just as we repeat the dot bomb bust.

Naked Capitalism notes how the rates for shipping have plummeted. Too much. The ships are returning to port. Its not worth running them at today's rates:

There are several instances of letters of credit being refused. In particular, I'm hearing a TON of rumors from people who should know that Russia letters of credit no longer will be accepted and than cargos going to Russia are having to be reloaded as the payment cannot be completed.

Also I expect my readers to also be Calculatedrisk readers. Quite blunty, the commodities crash has created a very simple issue: Customers cannot afford to accept delivery of anything that has substantially decreased in value (copper, lumber, non-precious metals). Every is giving little examples here and there of deliveries being refused as payment would bankrupt the receiving company. Heck, with the reduction in consumer spending, who needs to produce more.

I also expect you to have been reading Calculatedrisk or Nakedcapitalism's articles

California is also trying to slow foreclosures. Basically the market is going from the roaring times at Point A (black dot). Due to job losses and tightening credit, we were moving to Point C via Point B. Why not direct? At first demand dropped while the sellers 'held out' in denial; In English, the demand curve shifted (From Demand1 to Demand2) while we stayed on the Supply1 curve. Thanks to foreclosures and underwater owners, we are now drifting to the Supply2 curve and the Demand2 curve (Point C).

California is tring to artificially limit supply. They think this will increase demand and put us back at A or C'. But...they cannot drive the demand curve, only the supply curve.

So the best case scenario is back to point B. (This won't happen, the economy is too broken.) There is a huge risk to this stupid strategy. 1. Banks go on a loan strike and buyers flee the state. It also could 3) keep housing costs so artificially high that it effect unemployment driving us to a new demand curve. So it will drive us to a new demand curve (Demand 3). So the question is... will we end up at point D or E? Heck, we could get a 'slingshot effect' with more supply and go to F!

Faith is being lost in the system. What I'm seeing with shipping and airline demand is past the breaking point. If the government doesn't stop treating the symptoms and instead offers a cure... we're going to go into Depression. If Obama does too much to bail out the auto industry or airlines... it will create a trade war and that will be Smoot-Hawley II. If the government doesn't stimulate demand... that too is really bad. I vote for infrastructure that will help stimulate business for decades. Other countries will not tolerate it if we become protectionist. Smoot-Hawley was bad as it destroyed import/export jobs faster than the manufacturing jobs it was supposed to create. Heck, it destroyed manufacturing jobs too as our exports were tariffed at the other end. Bailout packages that give our industries too much of an advantage will have the same effect.

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